Insurance M&A Performance Tracker

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Insurance M&A Performance Tracker Measuring the correlation between acquisitions and share price performance

Performance from January 2016 to July 2017 A year of megadeals, political instability and strong equity markets has left insurance acquirers underperforming. But that doesn’t mean the industry should discount M&A all together – the long-term gains are encouraging. Table of contents Insurance M&A What is the Insurance M&A Performance Tracker?...... 2 High value and political volatility Performance Tracker deliver underperformance in 2016...... 3 Measuring the correlation between Methodology...... 6 acquisitions and share price performance About Cass Business School...... 7 About Mergermarket...... 8 About Willis Towers Watson...... 10

The Insurance M&A Performance Tracker 1 What is the Insurance M&A Performance Tracker?

Based on analysis from Willis Towers Watson and Cass Business School, the Tracker explores the performance of insurance companies that carry out major acquisitions against their sub-industry and regional indexes.

Key findings

In 2016, insurance firms that carried This is a reversal of the pattern A high-value, low-volume M&A out a significant acquisition were of the previous eight years, when environment, political volatility likely to underperform their acquirers were likely to outperform and a strong equity market sub-industry index. their sub-industry index. have contributed to the weaker performance of acquisitive insurers in 2016.

2 willistowerswatson.com High value and political volatility deliver underperformance in 2016

The Willis Towers Watson Insurance M&A Performance Tracker shows that insurers undertaking M&A in 2016 underperformed non-acquisitive peers for the first time since 2010

A turbulent 2016 has adversely affected the performance Figure 1: Insurers making acquisitions underperformed of acquirers in the insurance industry. For only the second in 2016. Showing median number of percentage points higher than time this decade, insurers undertaking an acquisition sub-industry index underperformed their sub-industry index, according to the Willis Towers Watson Insurance M&A Performance Tracker. 6 5

The research, based on analysis of all deals with a value 4 4.4 of more than US$50m conducted in the insurance sector, 3 showed that acquirers lagged the index by 6.4 percentage 3.0 2 points in the period six months before announcement to 2.2 the point six months after the deal completed. The last time 1 1.0 1.3 acquirers underperformed their sub-index was in 2010. 0

-1 In all other years from 2008 onwards, insurance acquirers outperformed their rivals. Over this period, insurers that -2 carried out a qualifying acquisition outperformed peers by -3 3 percentage points. Since 2012, the outperformance of -4 acquirers has become even more pronounced and they have -5 traded 4.4 percentage points above their sub-industry index. -6 -6.4 Interestingly, investors in 2016 initially gave acquirers early -7 Overall Overall 2016 only credit with a boost of 2.2 percentage points in the period (since 2008) (since 2012) six months before announcement to the end of one day Six months before announcement to after announcement. However, acquirers underperform by end of one day post announcement 8.6 percentage points in the period between announcement Six months before announcement and six months after completion. From 2012 to 2015, to six months post completion by contrast, acquirers only traded at a premium of 1.3 percentage points in the six months before announcement to the end of one day after announcement. This was followed by a further outperformance of 3.1 percentage points in the period between announcement and six months after completion.

The Insurance M&A Performance Tracker 3 “The analysis we have done is based on annual data going back to 2008. Underperformance by acquirers has happened once before, so it is worth noting that it is not unprecedented. The long-term trend still shows that acquirers outperform their peers,” says Willis Towers Watson’s Brendan McMaster.

Big deals mean big risk There are a number of factors that account for the recent underperformance. First, the general trend for high value and low volume in the M&A market. There were only 19 insurance deals tracked in 2016, and average deal value was almost double the average value in 2015. These figures mirror those from 2010, the last year in which acquisitive insurers underperformed.

“One explanation for the underperformance of acquirers could be that the market is nervous around big, transformational transactions and more comfortable when most activity involves smaller incremental bolt- ons,” McMaster says. “All other things being equal, big transactions are generally deemed to be riskier for the acquiring company.”

Life deals ebb away The drop in deal volumes could be attributed to a slowdown in activity in the life sector. There had been significant consolidation in life insurance, especially in the closed life space, where acquirers saw opportunities to cut costs through synergies and apply specialist knowledge to portfolios. Much of this consolidation has now run its course. Meanwhile, Asian life insurers have stepped back from dealmaking after actively pursuing M&A in 2015.

The fall in Property and Casualty (P&C) deals was less pronounced, but as transactions in this area are typically driven by the need to build scale in order to improve capital efficiency and manage competitive pressure, they are usually larger in size. The biggest insurance deal of 2016, ACE’s US$28bn purchase of Chubb, for example, was in the P&C space.

4 willistowerswatson.com Volatility rocks the market “One explanation for the underperformance However, it is worth noting that there have been years when of acquirers [in 2016] could be that the market average deal value has been high. In 2011, for example, deal is nervous around big, transformational values were above average but acquirers still outperformed their non-acquisitive peers. This suggests that geopolitical transactions and more comfortable when uncertainty and the surprise poll results in the UK’s Brexit most activity involves smaller incremental referendum and US Presidential elections could also have bolt-ons. All other things being equal, big been factors in shareholders’ cautious reactions to big- ticket transactions. transactions are generally deemed to be riskier for the acquiring company.” Separate Willis Towers Watson research tracking M&A across all sectors reveals similar trends to those in insurance, —Brendan McMaster, Senior Consultant, Willis Towers Watson with acquirers underperforming firms that did not do deals. This could indicate that investors are in “risk-off” mode, especially when deal values have been higher than normal. “Since 2008, insurance acquirers have Strong equity markets may be another factor in the weaker performance of acquisitive insurers. “Equity markets are outperformed the market, a trend that has doing well, so firms don’t need to do acquisitions as become even more pronounced since 2012. shareholders are rewarding those focusing on organic M&A is still beneficial and it will be interesting growth,” says Willis Towers Watson’s Fergal O’Shea. to see what the data for 2017 shows.”

Long-term gains —Fergal O’Shea, EMEA Life Insurance M&A Leader, However, the underperformance of insurance acquirers Willis Towers Watson in 2016 does not mean that M&A is not value accretive over the long term.

“The main observation is that although acquirers in the insurance sector haven’t done as well in 2016 as they have in previous years, there are plausible explanations for this,” says O’Shea. “Since 2008, insurance acquirers have outperformed the market, a trend that has become even more pronounced since 2012. M&A is still beneficial and it will be interesting to see what the data for 2017 shows.”

The Insurance M&A Performance Tracker 5 Methodology

All analysis is conducted from the perspective of All deals where the acquirer owned less than 50% of the the acquirer and based on standardised analysis. shares of the target after the acquisition were removed, hence no minority purchases have been considered. All Share price performance is measured as percentage deals where the acquirer held more than 50% of target change in share price and is compared to MSCI Indices. shares prior to the acquisition have been removed, hence no remaining purchases have been considered. This analysis is performance over two time periods: Deal data sourced from Thomson Reuters. from six months prior to the announcement date to one day post announcement All deals for which Thomson Reuters did not have a share from six months prior to the announcement to six months price for the acquirer six months prior to the announcement after the deal completed. were removed, as were acquisitions where the share price did not move over the period of the analysis. Only completed M&A deals with a value of at least $50m are included in this research. Willis Towers Watson/Cass Business School

6 willistowerswatson.com About Cass Business School

Cass Business School, which is part of City, University of London, is a leading global business school driven by world-class knowledge, innovative education and a vibrant community. Located in the heart of one of the world’s leading financial centres, Cass has strong links to both the City of London and the thriving entrepreneurial hub of Tech City. It is among the global elite of business schools that hold the gold standard of triple-crown accreditation from the Association to Advance Collegiate Schools of Business (AACSB), the Association of MBAs (AMBA) and the European Quality Improvement System (EQUIS).

For further information, visit: www.cass.city.ac.uk or to follow our research on Twitter: @cassbusiness.

The Insurance M&A Performance Tracker 7 About Mergermarket

Mergermarket is an unparalleled, independent mergers & acquisitions (M&A) proprietary intelligence tool. Unlike any other service of its kind, Mergermarket provides a complete overview of the M&A market by offering both a forward-looking intelligence database and a historical deals database, achieving real revenues for Mergermarket clients.

For more information, please visit www.mergermarket.com

Acuris Studios, the events and publications arm of Acuris, offers a range of publishing, research and events services that enable clients to enhance their own profile, and to develop new business opportunities with their target audience.

To find out more, please visit: www.acuris/publications

For more information regarding this report, please contact:

Simon Elliott Managing Director EMEA, Acuris Studios Tel: +44 (0)20 3741 1060 Email: [email protected]

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About Willis Towers Watson

Willis Towers Watson (NASDAQ: WLTW) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 40,000 employees serving more than 140 countries. We design and deliver solutions that manage risk, optimize benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas — the dynamic formula that drives business performance. Together, we unlock potential. Learn more at willistowerswatson.com.

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